1. WHEN IS THE RIGHT TIME TO RAISE FUNDING?
Raising capital too early can result in giving up too much equity before proving value, while waiting too long may cause cash flow strain or reduce negotiating power. The best time to raise funds is when the business is stable and positioned for growth, not in crisis.
Ask Yourself These Questions Before Raising Funds
• Do I have a clear plan for how the funds will be used?
• Have I proven market demand through traction, sales, or strong user growth?
• Have I explored alternative options like grants or revenue-based financing?
• Can I survive another six to twelve months without funding?
Founder Action Steps
• Create a twelve-month financial projection to assess funding needs
• Explore grants or revenue-based financing before considering equity
• Define a clear funding purpose to confidently communicate to investors
2. CHOOSING THE RIGHT TYPE OF FUNDING
Not all funding is the same, the choice should align with the business model, needs and long-term vision.
Which Funding Option is Right for You?
• If you want to scale quickly and are willing to give up equity, consider equity investment.
• If you need capital but do not want to set a valuation yet, consider convertible notes or a SAFE (Simple Agreement for Future Equity).
• If you have revenue and want capital without losing ownership, consider debt financing or revenue-based financing.
• If you want funding plus mentorship and strategic industry access, consider strategic partnerships or operating investors.
Founder Action Steps
• List your funding priorities: equity, control, repayment flexibility or mentorship
• Research funding types that align with your long-term vision
• Speak with at least three founders who have raised funds to learn from their experiences.
3. WHAT INVESTORS LOOK FOR AND HOW TO PREPARE
Investors assess risk and return before committing funds, placing strong value on the founder’s expertise and sector experience. They also look for well-prepared businesses, as disorganised legal or financial structures are major red flags that can undermine even promising ventures.
Key Considerations
• Company is legally registered and structured properly.
• Cap table is clear and accurate, showing who owns what percentage.
• Financial records are organised and up to date.
• Intellectual property is protected through trademarks, patents, or copyrights.
• Business contracts are legally sound.
• Proof of traction through users, revenue, or market validation.
Founder Action Steps
• Organise financial records and contracts in one place.
• Prepare a one-page traction report showing key growth metrics.
• Ensure your cap table is updated and easy to understand.
4. KEY LEGAL DOCUMENTS YOU MUST HAVE
Legal documents are essential and must be properly structured from the start to ensure clarity and avoid future risks. A strong legal foundation today can prevent costly mistakes tomorrow.
Essential Documents
1. Term Sheet: Outlines high-level investment terms such as valuation, equity percentage, and investor rights.
2. Shareholders’ Agreement: Defines investor rights, founder obligations, and exit terms to prevent future disputes.
3. Subscription Agreement: The final contract confirming the investment terms.
4. Convertible Note or SAFE Agreement: If raising through convertible instruments, this document outlines conversion terms.
5. Cap Table: Tracks business ownership and must be updated after every funding round.
6. Founder Vesting Agreement: Prevents co-founders from leaving early with significant ownership stakes.
Founder Action Steps
• Engage a lawyer to review agreements before signing.
• Ask potential investors about their expected legal requirements.
• Ensure these six key documents are ready before meeting investors.
5. HIDDEN LEGAL TRAPS THAT CAN HURT YOUR BUSINESS
Some investment terms may seem harmless initially but can create serious challenges over time. It is important to recognise hidden legal risks and negotiate terms that support long-term success.
Common Legal Pitfalls
• Control Clauses That Limit Your Power: Some investors demand board seats, veto rights, or majority voting power, giving them more influence than founders.
• Anti-Dilution Clauses That Work Against You: Investors may include clauses that prevent their equity from being diluted in future rounds.
• Liquidation Preferences That Cut You Out: If an investor has a two-times or three-times liquidation preference, they get paid first in an exit.
• Convertible Note Terms That Dilute You Unexpectedly: Poorly structured discount rates or conversion caps can mean investors take a larger portion of your company than you expected.
Founder Action Steps
• Review all investment terms carefully, not just the valuation
• Push back on unfair clauses that could hurt long-term growth
• Work with a lawyer to negotiate investor-friendly terms
6. BEYOND VENTURE CAPITAL: OTHER WAYS TO RAISE MONEY
Many founders see venture capital as the primary route to success, yet several profitable startups raise funding without giving up equity, making it worthwhile to explore alternative sources before diluting ownership.
Alternative Funding Options
• Revenue-Based Financing: Funding in exchange for a percentage of future revenue.
• Grants and Alternate Funding: Funding from governments or private organisations.
• Strategic Partnerships: Large companies sometimes invest in startups that align with their goals.
Founder Action Steps
• Research at least two non-equity funding options before considering investors.
• Identify potential strategic partners who may invest.
Funding is more than securing capital, it is about building on clear terms that support sustainable growth. The right investment should advance the vision, not compromise it. Remain informed and strategic, and choose partners who align with the goals, as each decision influences the future of the business.
